Money Matters

IndianMoney.com Research Team | Friday, December 04,2009, 03:50 PM

What defines a man today? Is it his stature in society, his achievements, his philanthropic activities or his bank balance? In today’s world whatever a man wishes to achieve money is the main motivator or the main constraint. Money is being used as the sole measure of one’s success in society. Money is what everyone wants, but do we ever pause to think about where this money comes from or who controls it. What is money? Where does it come from? Where does it go? Will it cease to exist someday? When did it originate?

Well, it began a long time ago. Man in his most primitive form was self sufficient and sought only what he needed for himself. But man evolved and wanted things that he didn’t have, but things that others had. To achieve this he created a system of exchange known as the barter system. Goods were the medium of exchange. But as his needs increased man found that he always needed a second willing party to exchange goods with. The goods got in exchange didn’t always have the same value. This led him to think of a common medium of exchange and a measure of value; this was how money was born.

It began with the most primitive form which historians say were beads or some kind of metal pellets followed by coins made out of precious metals like gold and silver. The first printed money was used in China as early as the late 1600’s.The problem was that the coins had intrinsic value(the value of the metal used) but the paper money had no intrinsic value. This problem was solved by using gold as a security for all the currency printed. This is the system that is still in practice.

The next question that arises with any new commodity is about its demand and supply. Money today exists in the form of coins, currency and demand deposits. The money supply of a country is got by adding up all the forms of money mentioned above. This is a discrete value, but if we want to know the supply of money over a period of time; we have to consider another element i.e. the velocity of circulation of money. Consider for example that you buy something by paying Rs.10. and this money is used to buy something else. Thus the Rs.10 is used for transactions worth Rs.20. Here the velocity of money is 2. Thus the supply of money over a period of time is the total amount of money times the velocity of money. The demand and supply of money in any country is controlled by the respective Central Bank of the country. In India it is regulated by the Reserve Bank of India. (RBI). The RBI controls and regulates all the commercial banks in our country and also acts as a banker to the government. It is also the only issuer of currency.

The issue of currency in India is controlled by the monetary policy of the country. The monetary policy changes according to the economic needs of the country. The monetary policy for 2009 aims at swift adaptations to curtail any adverse effects of the recent recession. The monetary policy also focuses on the inflation levels and incorporates measures to contain it within a certain limit. The monetary policy also varies from developed countries to developing countries. The developing countries are willing to accept a greater degree of inflation as compared to the developed countries.

The RBI also acts as a large pool of money from where the commercial banks can borrow and pay it back with interest. This pool is continuously being depleted and replenished. The RBI keeps a close watch on this pool for any defaults which might lead to a financial crisis. To avert such crises the RBI has put into place certain stringent requirements which have to be met by all the banks withdrawing money from this pool. Thus the RBI acts as the Generator, Operator and Destroyer of money in India. By destroyer in the preceding sentence we mean the soiled currency that is returned to the RBI and has to be burnt before reprinting of new currency. This is a cyclical process which continues like clockwork.

The RBI also acts as a banker to the government. If the government needs funds which are currently unavailable, a detailed report is sent to the RBI requesting the desired amount and explaining the need for and the exact allotment of the funds. The RBI then conducts a detailed analysis validating the government’s request and if it warrants an issuance of new currency; the RBI deposits gold equal to that amount and issues the currency. This is usually a tedious process and can take several months.

We have covered all the questions posed in the opening paragraph of our discussion but one; will it cease to exist someday? This is an open ended question which is up for debate. The future is wrought with endless possibilities and somebody may one day come up with a better substitute.

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IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.